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Judge Robert E. Blackburn of the U.S. District Court
for the District of Colorado concluded that the trustee's
Bankruptcy Code Section 548 fraudulent transfer claim is a claim of
the trustee, not a claim of the debtor, and because the trustee
isn't a party to the arbitration clause, it doesn't apply to the
trustee's claim.

Section 548(a)(1)(B) permits a trustee “to avoid a
transfer of an interest of the debtor in property made or incurred
within two years before the date of the bankruptcy petition if the
debtor ‘received less than a reasonably equivalent value in
exchange for such transfer' and (a) the debtor was insolvent at the
time of the transfer or became insolvent as a result of the
transfer; or (b) the debtor was engaged in a transaction for which
any property remaining with the debtor was an unreasonably small
capital; or (c) the debtor intended to incur, or believed he or she
would incur, debts that would be beyond the debtor's ability to
pay,” the court said.

The trustee's second claim for relief under
§ 12-14.5-235, C.R.S., which is part of the Colorado Uniform Debt
Management Services Act (CUDMSA), falls within the terms of the
arbitration clause; however, enforcement of the arbitration clause
would “substantially undermine the orderly, efficient, and
effective administration of the bankruptcy estate,” the district
court concluded.

The “fundamental purposes of the Bankruptcy Code
take precedence over the requirements of the arbitration clause and
the Federal Arbitration Act (FAA),” the court said. Thus, the
bankruptcy court properly denied the creditor's motion to compel
arbitration, the court said.

Arbitration Clause in
Contract

Debtor Lu Ann Ratzlaff Craig entered into a contract
with Swift Rock Financial, Inc. d/b/a World Law Group, d/b/a World
Law Debt (WLD), and Orion Processing LLC, d/b/a World Law
Processing (WLP) for debt resolution services.

On the same day, the debtor entered into a second
agreement with Global Client Solutions, LLC (Global) for account
services. The debtor signed a dedicated account agreement and
application with Global that contained an arbitration clause. Under
the clause, any dispute between Global and the debtor would be
resolved in arbitration.

Under her contract with WLD and WLP, the debtor paid
$9,154 in fees. The debtor also paid Global $180 in fees. Later,
she closed her account with Global and terminated her relationship.
Subsequently, the debtor filed for Chapter 7 protection, in which
the debtor's nonexempt assets are liquidated and the proceeds are
distributed to creditors.

Chapter 7 trustee Douglas E. Larson filed two claims
to recover approximately $9,334 that the debtor paid to WLD, WLP,
and Global.

Global moved to compel arbitration of the trustee's
claims under the arbitration clause in the contract between Global
and the debtor. Global also disputed the allegation that WLD, WLP,
and Global “acted in concert” and are joint and severally
liable.

No Arbitration for Trustee's
Claims

The bankruptcy court denied the motion to compel
arbitration, concluding that the case brought by the trustee is
“fundamentally a fraudulent transfer claim” under Section
548.

The bankruptcy court determined that the trustee's
CUDMSA state law claim wasn't a core proceeding, which under 28
U.S.C. § 157(b) involves administration of the bankruptcy estate
and is based on bankruptcy law. Under 28 U.S.C. § 157(c), a
bankruptcy judge may hear a proceeding that is not a core
proceeding, but is related to a bankruptcy case; however, the judge
may not make a final determination, but must submit proposed
findings of fact and conclusions of law to the district
court.

Neither of the trustee's claims were appropriate for
arbitration, the bankruptcy court said, and denied Global's motion
to compel arbitration.

Global appealed to the district court, arguing that
the trustee's Section 548 claim was really a “garden variety
contract claim which should be compelled to arbitration” under the
arbitration clause.

Not a ‘Garden Variety Contract
Claim.'

The district court disagreed with Global and found
that the Section 548 claim was based on allegations that the debtor
make a transfer to the defendants within two years of the petition
date, the transfer was for less than reasonably equivalent value in
exchange, and one or more of the requirements of Section
548(a)(1)(B)(ii) were satisfied.

The court also pointed out that the trustee isn't a
party to the arbitration clause asserted by Global. Therefore, the
arbitration clause isn't applicable to the Section 548 claim of the
trustee, the court said.

Arbitration Undermines
Administration of Estate

On the CUDMSA claim, the court determined that the
bankruptcy court has discretion to decline to enforce an
arbitration provision only if arbitration would conflict with the
underlying purposes of the Bankruptcy Code.

The trustee stands in the shoes of the debtor, the
court said, and if the debtor were asserting this claim outside of
bankruptcy, the claim on its face would fall within the arbitration
clause.

The court looked to the nature of the two claims
asserted by the trustee and found that there was inherent conflict
between arbitration of the CUDMSA claim, and the underlying
purposes of the Bankruptcy Code. In this case, the “fundamental
purposes of the Bankruptcy Code are paramount to the requirements
of the arbitration clause and the FAA,” the court said. According
to the court, enforcing arbitration would substantially undermine
the orderly, efficient, and effective administration of the
bankruptcy estate, and requiring arbitration would deprive the
estate, and its creditors of the possibility of any recovery of
assets for the estate.

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